Can Fixed Indexed Annuities Benefit Retirement Savings?

There are many options when it comes to setting aside money for retirement. Individuals planning for life after they quit working can select numerous investment strategies such as IRAs, stock and bond investments, and employer-sponsored retirement plans. There are times, however, when all of these retirement options do not provide the steady income one needs to retire comfortably. Here, the concept of an annuity may represent a valid solution.

Retirement annuities – particularly fixed indexed annuities — have long been a popular means of generating retirement income, and serve as a valuable component of a diversified retirement portfolio. Recent shifts in the annuities market, including higher interest rates, have made investor appetite for annuities higher than in years past. In this guide, we’ll provide the details you need to understand if a fixed indexed annuity is right for your financial needs and goals.

Annuities: A Quick Guide

You may have heard the term “annuity”, but do not understand what it is or how it works. In simple terms, annuities are insurance products that pay out an income, and remain a popular choice for investors who wish to receive a steady stream of income in their retirement years. The way an annuity works is that the investor chooses an annuity product, then invests in it. Depending on the setup and type of annuity, it then makes payments in the future.

There are many different types of annuity available, each with their own advantages. For the purposes of this discussion, we will consider the fixed annuity, sometimes referred to as a fixed index annuity, or FIA. An FIA offers a guaranteed payout amount and rate of interest and is tied to an index like the Standard & Poor 500 or the New York Stock Exchange, which is specified in the annuity contract/policy. Conversely, a variable annuity is tied to the performance of the investments associated with the policy. Fixed annuities may generate higher returns on a tax-deferred basis, depending on the investment performance.

The Fixed Index Annuity

Across the country, financial advisors recommend that their clients diversify, or place money into different investment products across market categories. This is a smart financial move, as it protects investments from loss. Imagine, for example, you invested all of your money into a hot technology stock, only to see that stock lose value in a short amount of time. What would you do? Diversification is the key, investing different amounts into different investment vehicles and not worrying as much about short-term performance gains or losses. For retirement planning, diversification can mean establishing multiple retirement accounts, including Traditional and Roth IRAs, participating in employer-sponsored plans like 401(k)s, and purchasing real estate properties or traditional stocks and bonds.

Fixed index annuities (FIAs) can be another valuable diversification tool in the retirement planning toolbox. This tax-favored accumulation product is issued by an insurer, and the annuity’s growth is benchmarked to an established stock index instead of the interest rate common to other types of annuities. Here are some of the features that make FIAs an attractive option:

  • The annuity’s growth is subject to floors and caps, which means that the growth will not exceed or fall below pre-specified limits, even if the benchmarked stock index fluctuates outside the limits established in the annuity’s documentation.
  • The issuing insurance company carries some of the risk, particularly if the stock market index/indices decline.
  • No principal is lost, even if the market index falls sharply. In other words, the premiums you pay to fund the FIA are protected. Earnings are guaranteed as well; issuing insurance agencies are required to set aside the assets needed to pay claims.
  • Potential gains vary, but typically produce between 3% and 9% in growth.
  • Earnings grow on a tax-deferred basis; taxes are paid only when distributions or withdrawals are made, and then they are taxed as ordinary income.
  • FIAs may be purchased using rollover funds from an IRA or funds transferred from other tax-qualified retirement plans. They may also be purchased using any lump sum distributions you may receive from a pension plan or 401(k).
  • FIAs typically earn higher interest rates than other diversification products like CDs or fixed-interest deferred annuities.

Is a Fixed Index Annuity Right for You?

There are many variables at play when one wishes to ensure a stable and comfortable financial future. Many people choose to invest money on their own, placing it into appropriate retirement savings products. However, the services of a retirement planning professional can be invaluable in helping accumulate retirement assets, then preserving the value of those assets for many years to come. FIAs may be a great solution for retirement preparation, and interested parties should be prepared to ask their financial planning professionals certain questions to determine if this strategy is right for your particular needs and goals.

If you:

  • Have existing retirement plans in place but want to diversify your assets
  • Need income to continue well into the future
  • Want the potential for investment growth, but in a low-risk way
  • Wish to obtain a guaranteed minimum rate of return, no matter what the stock markets do
  • Want an insurer to assume the risk from your investments

Then an FIA may be the correct option for you to investigate. Be sure to ask your financial advisor about the risks associated with FIAs; while the insurer assumes much of this risk, there are still potential drawbacks to funding an FIA. One drawback is in the performance of the annuity – other investment products may produce a greater rate of return, but at the expense of higher exposures to risks in a volatile stock market. Another potential drawback is that early cancellation of an FIA contract may result in steep tax penalties and surrender charges. If you find the right FIA and are prepared to hold onto it as long as the contract specifies, this is a drawback that is easy to overcome, however.

It is also a good idea to look at several FIAs before settling on one. Each annuity has its own contract language, rates of return, and guarantees. Some may even offer premium bonuses. Talk to your retirement planning professional today – an FIA can help you diversify your retirement portfolio and provide income to help you cover your expenses long after you retire.


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